Investing Archives

Jul

2025

How to Use the Risk-Reward Ratio in Investing

By Brian O'Connell | Growing Wealth, invest, Investing, Terminology | Comments Off

Table of Contents

What Is the Risk-Reward Ratio?
How to Calculate Risk-Reward Ratio
Pros and Cons of the Risk-Reward Ratio
Three Risk-and-Reward Investor Types
FAQ

The risk-reward ratio in trading is a way of assessing the potential gain from a trade versus the potential risk of loss. This ratio is also useful for comparing the relative risk and reward potentials of different trades.

For example, a risk-reward ratio of 1:3 means that an investor is prepared to risk losing $1 for the possible gain of $3. A risk-reward ratio of 1:1 means that the risk of loss is about the same as the potential gain.

The risk-reward ratio is a valuable analytical tool available to investors. Since no investment is genuinely risk-free, the risk-reward ratio helps calculate the potential outcomes of any investment transaction — good or bad.

Key Points

• The risk-reward ratio is a useful tool for investors, capturing potential gains against the risks involved in an investment transaction.

• Calculating the risk-reward ratio requires dividing net profits by the maximum risk of an investment, providing a straightforward evaluation of investment potential.

• Utilizing the risk-reward ratio aids in informed decision-making, helping investors assess whether potential rewards justify the risks taken, given their own risk tolerance.

• Investors demonstrate different levels of risk tolerance: conservative, moderate, and aggressive.

• Despite its utility, the risk-reward ratio has limitations. It is not predictive, and it cannot account for market volatility or external factors that may impact investment outcomes.

What Is the Risk-Reward Ratio?

As noted, the reward-to-risk ratio is a way to assess how much money an investor might gain versus how much they’re risking in order to generate that potential gain. Although the risk-reward ratio is chiefly an analytical tool, it can be particularly important for those with small portfolios, and it may be helpful to review tips on risk for new investors.

Typically, the more risk involved in an investment — when trading stocks, for example — the more ample the reward if the investment turns out to be a winner. Conversely, the less risk you take with an investment, the less reward will likely be earned on the investment.

For example, when buying bonds, investors take on relatively low risk for a relatively low return.

Compare that scenario to a stock market investor, who has no guarantees that the money they steer into a stock transaction will be intact in the future. It’s even possible the stock market investor will lose all of their investment principal if the stock turns sour and loses significant value.

Correspondingly, this investor is presumably looking at a greater reward for the risk taken when buying a stock. If the stock climbs in value, the investor is rewarded for the risk they took with the investment.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

How to Calculate Risk-Reward Ratio

The reward-to-risk ratio formula is a fairly straightforward calculation.

Risk-Reward Ratio Formula

To calculate risk-reward ratio, divide potential net profits (which represent the reward) by the cost of the investment’s maximum risk.

For instance, for a risk-reward ratio of 1:3, the investor risks $1 to hopefully gain $3 in profit. For a 1:4 risk-reward ratio, an investor is risking $1 to potentially make $4.

Example of a Risk-Reward Ratio Calculation

Let’s say an investor is weighing the purchase of a stock selling at $100 per share and the consensus analyst outlook has the stock price topping out at $115 per share with an expected downside bottom of $95 per share.

The investor makes the trade, hoping the stock will rise to $115, but hedges their investment by putting in a stop-loss order at $95, ensuring the investment will do no worse by automatically selling out at $95.

A stop loss order is a type of market order in which the order is placed with a stockbroker to buy or sell a specific stock once that security reaches a predetermined price level. The mechanism is specifically designed to place a limit on an investor’s stock position.

The investor can also lock in a profit by instructing the broker to automatically sell the stock, if it reaches its perceived apex of $115 per share.

In this scenario, the “risk” figure in the equation is $5 — the total amount of money that can be lost if the stock declines and is automatically sold out at $95 (i.e., $100 minus $95 = $5).

The “reward” figure is $15. That’s the amount of per-share money the investor will earn once the share price rises from buying the stock at $100 per share and selling it if and when the stock rises to $115 per share.

Thus, with an expected risk of 5 and an expected reward of 15, the actual risk reward ratio is 1:3 — the potential to lose $5 in order to gain $15.

Pros and Cons of the Risk-Reward Ratio

There are pros and cons to using the risk-reward ratio when investing.

As for the upsides, it’s a relatively simple formula and calculation that can help investors gauge whether their strategy makes sense.

On the other hand, it’s a relatively simple formula and calculation that may not be terribly accurate, and doesn’t necessarily deliver a lot of additional insight into a strategy. That’s something investors should take to heart, and why they may not want to only rely on risk-reward ratio to guide their overall strategy.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Three Risk-and-Reward Investor Types

Investors have their own comfort levels when assessing risk and reward ratios with their portfolios, with some proceeding cautiously, some taking a moderate dose of investment risk, and still others taking on more risk by investing aggressively on a regular basis.

The investment portfolios you build, either by yourself or with the help of a money management professional, reflect your personal risk tolerance. When doing so, it also helps to know stock market basics.

Typically, there are three different types of investor when it comes to risk tolerance:

• Conservative investors. These investors focus on low-risk, low-reward investments like cash, bonds, bond funds, and large-company stocks or stock mutual funds.

• Moderate investors. These investors look for a blend of risk and reward when constructing their investment portfolios, putting money into lower-risk investment vehicles like bonds, bond funds, and large-company stocks and funds with more broadly based categories like value and/or growth stocks and funds, international stocks, and funds.

They may also consider a small slice of alternative funds and alternative investments like real estate, commodities, and stock options and futures.

• Aggressive investors. This type of investor may completely bypass conservative investments and elect to build an investment portfolio with higher-risk stocks and funds (like foreign stocks or small company stocks), along with higher-risk assets like gold and oil (commodities), stock options and futures, and more.

How Investors May View Risk vs. Reward

Each of the above investors recognizes the realities of risk and the potential of reward and balances them in different ways. Even conservative investors will accept a little risk to gain some reward.

For example, a conservative investor may invest in a corporate bond or municipal bond, knowing that in return for a guaranteed profit (in the form of paid interest) and upside asset protection (the bond’s principal being repaid), they take on the small risk that the bond will default.

An aggressive investor understands that by placing money in a high-risk stock, they are potentially risking some or all of the investment if the stock goes under, or significantly underperforms. In return for that risk, the more aggressive investor may reap the financial rewards of a booming stock price and a resulting major return on his investment, but there are no guarantees.

The Takeaway

The risk-reward ratio is helpful in allowing investors to get an idea of how much they stand to gain versus how much they stand to lose in a given investment situation. Any risk-reward engagement depends on the quality of the research undertaken by the investor and/or a professional money management specialist.

That research should set the proper expected parameters of the risk (i.e., the money the investor can lose) and the reward (i.e., the expected portfolio gain the investment might make.) Once the risk and reward boundaries are set, the investor can weigh the potential outcomes of the investment scenario and make the decision to go forward (or not) with the investment.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is a good risk-reward ratio?

Generally speaking, a good risk-reward ratio is one that skews toward reward, rather than risk. But that range will depend on each investor’s tolerance for risk, as well as other means of assessing the potential outcome of a trade.

What is a poor risk-reward ratio?

A poor risk-reward ratio would be one that is higher or greater than 1, as that would indicate that an investment involves more risk relative to the potential reward. But again, it depends on the individual and the investment in question.

What are some things that the risk-reward ratio doesn’t take into account?

The risk-reward ratio doesn’t take several factors into account, and some of those include external and current events, market volatility, and liquidity in the markets.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOIN-Q325-028

Jul

2025

What Is a Roth 401(k)?

By Pam O’Brien | Growing Wealth, invest, Investing, Life & Career, Preparing for Retirement | Comments Off

Table of Contents

Roth 401(k) Definition
History and Purpose of the Roth 401(k)
How a Roth 401(k) Works
Roth 401(k) Contribution Limits
Roth 401(k) Withdrawal Rules
Roth 401(k) RMDs
Pros and Cons of a Roth 401(k)
Is a Roth 401(k) Right for You?
FAQ

A Roth 401(k) is a type of retirement plan that may be offered by your employer. You contribute money from your paychecks directly to a Roth 401(k) to help save for retirement.

A Roth 401(k) is somewhat similar to a traditional 401(k), but the potential tax benefits are different.

Here’s what you need to know to understand how Roth 401(k)s work and to decide if it may be the right type of retirement account for you.

Key Points

• Contributions to a Roth 401(k) are made with after-tax dollars, generally allowing tax-free growth and tax-free withdrawals in retirement.

• Withdrawals are penalty-free if the account is open for at least five years and the individual is 59 1/2 or older.

• Employers can now match contributions directly into a Roth 401(k), rather than into a separate traditional 401(k) due to the SECURE Act 2.0.

• Catch-up contributions are available for those 50 and older, with higher limits in 2025 for individuals ages 60 to 63.

• As of 2024, required minimum distributions (RMDs) are no longer required for Roth 401(k)s.

Roth 401(k) Definition

A Roth 401(k) combines some of the features of a traditional 401(k) plan and a Roth IRA.

Like a traditional 401(k), a Roth 401(k) is an employer-sponsored retirement account. Your employer may offer to match some of your Roth 401(k) contributions.

Like a Roth IRA, contributions to a Roth 401(k) are made using after-tax dollars, which means income tax is paid upfront on the money you contribute.

History and Purpose of the Roth 401(k)

The Roth 401(k) was first offered in 2006 as a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001. Modeled after the Roth IRA, the Roth 401(k) was created to give employees an employer-sponsored investment savings plan that allowed them to save for retirement with after-tax dollars. Employees with a Roth 401(k) pay taxes on their contributions when they make them and withdraw their money tax-free in retirement, as long as the account has been funded for at least five years.

Originally, the Roth 401(k) was due to expire at the end of 2010, but the Pension Protection Act of 2006 made it permanent.

How a Roth 401(k) Works

Contributions to a Roth 401(k) are typically made directly and automatically from your paycheck. As mentioned above, your contributions are taxed at the time you contribute them, and you pay income taxes on them. In general, your money grows in the account tax-free and withdrawals in retirement are also tax-free, as long as the account has been open at least five years.

Differences Between a Roth 401(k) and a Traditional 401(k)

While a Roth 401(k) shares some similarities to a traditional 401(k), there are some differences between the two plans that you should be aware of. When it comes to 401(k) vs Roth 401(k), these are the differences:

• Contributions to a Roth 401(k) are made with after-tax dollars and you pay taxes on them upfront. With a traditional 401(k), your contributions are made with pre-tax dollars, and you pay taxes on them later.

• With a Roth 401(k), your take-home pay is a little less because you’re paying taxes on your contributions now. With a traditional 401(k), your contributions are taken before taxes.

• Your money generally grows tax-free in a Roth 401(k). And in retirement, you withdraw it tax-free, as long as the account is at least five years old and you are at least 59 ½. With a traditional 401(k), you pay taxes on your withdrawals in retirement at your ordinary income tax rate.

• You can start withdrawing your Roth 401(k) money at age 59 ½ without penalty or taxes. However, you must have had the account for at least five years. With a traditional 401(k), you can withdraw your money at age 59 ½. There is no 5-year rule for a traditional 401(k).

Recommended: IRA vs 401(k)

How Employer Matching Works in a Roth 401(k)

Roth 401(k)s are typically matched by employers at the same rate as traditional 401(k)s plans. Your employer may match your Roth 401(k) contributions up to a certain amount or percentage, depending on the employer and the plan.

Historically, matching contributions for employees with a Roth 401(k) had to be put into a separate traditional 401(k). But because of the SECURE Act 2.0, this changed in 2023. Now employers have the option to make matching contributions directly into an employee’s Roth 401(k).

There are two main methods employers typically use to match employees’ Roth 401(k) contributions:

• Partial matching: This is when the employer matches part of an employee’s contribution, usually up to a particular percentage of their salary, such as $0.50 for every employee dollar contributed up to 6% of the employee’s salary.

• Dollar-for-dollar matching: In this case, the employer matches the employee’s contributions 100%, typically up to a certain percentage of the employee’s salary.

It’s important to note that not all employers offer Roth 401(k) matching. Those who do offer it may have certain stipulations. For example, employees may be required to contribute a specific minimum amount to their Roth 401(k) for the employer match to kick in. Check with your Roth 401(k) plan documents or your HR department to find out about your employer’s policy for matching contributions.

Roth 401(k) Contribution Limits

A Roth 401(k) and a traditional 401(k) share the same contribution limits. Both plans allow for the same catch-up contributions for those 50 and older (learn more about catch-up contributions below).

Here are the 2025 contribution limits for each type of plan.

	Roth 401(k)	Traditional 401(k)
2025 contribution limit for those under age 50)	$23,500	$23,500
2025 standard catch-up contribution limit for individuals age 50 and up	$7,500	$7,500
2025 contribution limit for those 50 and older with standard catch-up	$31,000	$31,000
2025 enhanced catch-up contribution limit for those ages 60 to 63 due to SECURE 2.0	$11,250	$11,250
2025 contribution limit for those ages 60 to 63, per SECURE 2.0	$34,750	$34,750
2025 contribution limit for employee and employer contributions combined	$70,000 $77,500 with standard catch-up $81,250 with enhanced Secure 2.0 catch-up	$70,000 $77,500 with standard catch-up $81,250 with enhanced Secure 2.0 catch-up

Catch-Up Contributions for Those 50 and Older

Individuals who are age 50 and up have the opportunity to make catch-up contributions to a Roth 401(k). Catch-up contributions are additional money individuals can contribute to their Roth 401(k) beyond the standard yearly limit.

So, in 2025, if you contribute the standard annual limit of $23,500 to your Roth 401(k), you have the option of contributing an additional $7,500 for the year — for a total of $31,000, as long as you are age 50 or older. And if you are aged 60 to 63, in 2025, you can take advantage of enhanced SECURE 2.0 catch-up contributions of $11,250 instead of $7,500, for a total of $34,750.

Just like the standard contributions you make to a Roth 401(k), when you make catch-up contributions to your account, you also use after-tax dollars. That means you can withdraw the money tax-free in retirement.

Making catch-up contributions is one important factor to consider when you’re thinking about how to manage your 401(k), especially as you get closer to retirement.

Roth 401(k) Withdrawal Rules

A Roth 401(k) has certain withdrawal rules, including the 5-year rule. Under this rule, an individual can start taking tax-free and penalty-free withdrawals from a Roth 401(k) at age 59 ½ only when they’ve had the account for at least five years.

This means that if you open a Roth 401(k) at age 56, you can’t take tax- or penalty-free withdrawals of your earnings at age 59 ½ the way you can with a traditional 401(k). Instead, you’d have to wait until age 61, when your Roth 401(k) is five years old.

Early Withdrawal Rules

There are some exceptions to the withdrawal rules. For example, it’s possible to take early withdrawals — meaning withdrawals taken before age 59 ½ or from an account that’s less than five years old — from a Roth 401(k) without taxes and penalties, if an individual is disabled or passes away.

Other early withdrawals may be taken as well, but they are subject to taxes and a 10% penalty. However, you may not owe taxes and penalties on the entire amount, only on the earnings.

Here’s how it typically works: You can withdraw as much as you’ve contributed to a Roth 401(k) without paying taxes or penalties because your contributions were made with after-tax dollars. In other words, you’ve already paid taxes on them. Any earnings you withdraw, though, are subject to taxes and penalties, and you’ll owe tax proportional to your earnings.

For example, if you have $150,000 in a Roth 401(k) and $130,000 of that amount is contributions and $20,000 is earnings, those $20,0000 in earnings are taxable gains, and they represent 13.3% of the account. Therefore, if you took an early withdrawal of $30,000, you would owe taxes on 13.3% of the amount to account for the gains, which is $3,990.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA online, but you typically pay investment costs for the securities in your portfolio.

Roth 401(k) RMDs

Previously, individuals with a Roth 401(k) had to take required minimum distributions (RMDs) starting at age 73 (the age for RMDs was raised from 72 to 73 in 2023, thanks to SECURE 2.0). However, in 2024, as a stipulation of SECURE 2.0, RMDs were eliminated for Roth accounts in employer retirement plans.

By comparison, traditional 401(k)s still require taking RMDs starting at age 73.

Pros and Cons of a Roth 401(k)

A Roth 401(k) has advantages, but there are drawbacks to the plan as well. Here are some pros and cons to consider:

Pros

You can make tax-free withdrawals in retirement with a Roth 401(k).
This can be an advantage if you expect to be in a higher tax bracket when you retire, since you’ll pay taxes on your Roth 401(k) contributions upfront when you’re in a lower tax bracket. Your money grows tax-free in the account.

There are no longer RMDs for a Roth 401(k).
Because of the SECURE 2.0 Act, required minimum distributions are no longer required for Roth 401(k)s as of 2024. With a traditional 401(k), you must take RMDs starting at age 73.

Early withdrawals of contributions in a Roth 401(k) are not taxed.
Because you’ve already paid taxes on your contributions, you can withdraw those contributions early without paying a penalty or taxes. However, if you withdraw earnings before age 59 ½, you will be subject to taxes on them.

Cons

Your Roth 401(k) account must be open for at least five years for penalty-free withdrawals.
Otherwise you may be subject to taxes and a 10% penalty on any earnings you withdraw if the account is less than five years old. This is something to consider if you are an older investor.

A Roth 401(k) will reduce your paycheck now.
Your take home pay will be smaller because you pay taxes on your contributions to a Roth 401(k) upfront. This could be problematic if you have many financial obligations or you’re struggling to pay your bills.

Is a Roth 401(k) Right for You?

If you expect to be in a higher tax bracket when you retire, a Roth 401(k) may be right for you. It might make sense to pay taxes on the account now, while you are making less money and in a lower tax bracket.

However, if you expect to be in a lower tax bracket in retirement, a traditional 401(k) might be a better choice since you’ll pay the taxes on withdrawals in retirement.

Your age can play a role as well. A Roth 401(k) might make sense for a younger investor, who is likely to be earning less now than they may be later in their careers. That’s something to keep in mind as you choose a retirement plan to help reach your future financial goals.

The Takeaway

Participating in a Roth 401(k) through your employer can help you save for retirement. Employees make contributions using after-tax dollars, and the money can be withdrawn tax-free in retirement. Your employer may match your contributions, which is essentially free money.

Of course, a Roth or traditional 401(k) isn’t the only way to save for retirement. Along with an employer-sponsored account, you might want to boost your savings with an IRA or a brokerage account, for instance. Whatever type of accounts you choose, the important thing is to have a retirement savings strategy in place to help make your post-working life as comfortable as possible.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help build your nest egg with a SoFi IRA.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of individual retirement accounts (IRAs).

FAQ

How is a Roth 401(k) taken out of a paycheck?

Contributions to a Roth 401(k) are automatically deducted from your paycheck. Because contributions are made with after-tax dollars, meaning you pay taxes on them upfront, your paycheck will be lower.

What is the 5-year rule for a Roth 401(k)?

According to the 5-year rule for a Roth 401(k), the account must have been open for at least five years in order for an investor to take qualified withdrawals of their Roth 401(k) earnings at age 59 ½ without being subject to taxes and a 10% penalty.

What happens to a Roth 401(k) when you quit?

When you quit a job, you can either keep your Roth 401(k) with your former employer, transfer it to a new Roth 401(k) with your new employer, or roll it over into a Roth IRA.

There are some factors to consider when choosing which option to take. For instance, if you leave the plan with your former employer, you can no longer contribute to it. If you are able to transfer your Roth 401(k) to a plan offered by your new employer, your money will be folded into the new plan and you will choose from the investment options offered by that plan. If you roll over your Roth 401(k) into a Roth IRA, you will be in charge of choosing and making investments with your money.

Do I need to report a Roth 401(k) on my taxes?

Because your contributions to a Roth 401(k) are made with after tax dollars and aren’t considered tax deductible, you generally don’t need to report them on your taxes. And when you take qualified distributions from a Roth 401(k) they are not considered taxable income and do not need to be reported on your taxes. However, it’s best to consult with a tax professional about your particular situation.

Can you roll over a Roth 401(k) into a Roth IRA?

Yes, you can roll over a Roth 401(k) into a Roth IRA. You can do this, for example, if you leave your job. Rolling over your Roth 401(k) typically gives you a wider range of investment options to choose from. Roth IRA rollovers can be complicated, however, so you may want to consult a tax professional to make sure you don’t incur any unexpected tax situations.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOIN-Q325-058

Jul

2025

Market Manipulation: An Overview for Retail Investors

By Brian O'Connell | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Market Manipulation?
What Are Examples of Market Manipulation?
How to Avoid Market Manipulation
FAQ

The definition of market manipulation, according to the Securities and Exchange Commission (SEC), is a deliberate, illegal interference in markets to alter the price of securities and defraud investors. In short, market manipulation is just what it sounds like, and unfortunately it’s not uncommon — but it can be difficult to prove.

There are numerous schemes that people use to manipulate market outcomes, including pump-and-dump and poop-and-scoop.
Given the legal perils, and the chance that investors could get caught up in some form of market manipulation, it’s critical to have a basic understanding of what it is and what it can look like.

Key Points

• Market manipulation is the illegal attempt to alter the price of a security and/or defraud investors.

• There are numerous ways that bad actors try to influence the price of a security in order to profit.

• Pump-and-dump is one common scheme, where the price of a microcap stock is artificially inflated before it’s sold.

• While not uncommon, market manipulation can be difficult to prove.

• Investors can protect themselves by knowing the red flags of market manipulation.

What Is Market Manipulation?

According to the U.S. Securities and Exchange Commission, the definition of market manipulation is the “Intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities, or the Intentional interference with the free forces of supply and demand.”

For example, any action to impact the supply or demand for a stock and drive a stock’s price up or down by artificial means constitutes stock market manipulation.

The SEC views market manipulation as harmful, since the practice “affects the integrity of the marketplace.” According to the regulatory agency, financial market prices “should be set by the unimpeded collective judgment of buyers and sellers.” Anything else would undermine the orderly execution and trustworthiness of the markets.

The SEC has warned market leaders that investors will “stay out of your market if they perceive that it is not fair and is subject to market manipulation.”

Recommended: What Are Securities in Finance?

What Are Examples of Market Manipulation?

There are several methods that market manipulators use to interfere with markets, creating investment risk for those who fall victim to their schemes.

“Pump-and-Dump”

The pump-and-dump scheme is a common form of market manipulation. It occurs when a market participant who holds a specific investment knowingly issues false or misleading statements about the underlying company in order to pump up the price.

When investors fall for the information and buy the stock, the manipulator can either short the stock, or wait for the optimal price point and then sell the stock before the truth emerges, and investors dump their holdings.

For example, a market manipulator may start a rumor that a publicly traded company is going to be bought by a larger company. If enough investors believe the rumor, more investors buy the stock (whether via an online investing platform or through a brokerage), pushing up the stock price.

Once the price hits a certain level, the aim is to sell shares of the stock and pocket a potentially significant profit. Those investors who don’t sell are left with a stock that could drop in price when they realize the underlying company isn’t being bought out.

The Poop-and-Scoop Scheme

The so-called poop-and-scoop scam is the reverse of a pump-and-dump. Here, fraudulent rumors are spread with the aim of pushing down a security’s price. Again, the stock could be shorted or bought at a low point, and sold when the rumors abate and the price rebounds.

The “Wash” Method

Wash trading is a form of market manipulation where a group of investors acting in tandem buy and sell the same stock repeatedly over a period of a few days or even a few hours.

By and large, an “active” trading period of a stock is considered a sign of an increase in value, and the stock may swing upward as more investors notice the stock is being actively and even aggressively traded.

This scheme, also known as “painting the tape,” makes it seem as if investors are trading stocks actively when they’re not.

Trade “Spoofing”

The practice of trade spoofing is also known as “layering,” and occurs when market manipulators set trading orders with brokers they have no intention of executing.

In financial markets, it’s common for market orders to be public. When large orders to buy or sell a certain security are made, other investors jump aboard hoping to piggyback the unexecuted trade, thus drumming up more interest — and more investors — in the security.

Market manipulators leverage that momentum trading, and wait until the time is right to buy or sell the security as other investors’ trader orders are fulfilled.

With the “spoof” finalized, the investors who wound up actually executing their trades may then see the stock move against their intended price target. Meanwhile, the “spoofer” has cancelled the trade and taken a profit on the artificial stock price, by buying or selling the security based upon intended market movement.

Marking the Close

When a market manipulator buys a security at the close of the trading day, and pays more than the bid level, or the asking price of the security, that manipulator could be “marking the close.”

As the price of a stock at day’s end is usually a reliable marker for the investment’s price performance going forward, other investors often jump in and buy the stock. The market manipulator leverages the gain and locks in a profit by quickly selling the stock once its price moves upward.

Recommended: 5 Investment Strategies for Beginners

How to Avoid Market Manipulation

It’s not always easy to see the “red flags” that signal an active market manipulator. However, beginner investors who are aware of common scams may be able to avoid falling victim to their scams.

Invest for the Long Term

Since market manipulators often profit from day-to-day stock movements, investors with long-term portfolios, who don’t engage in market timing, are largely insulated from the impact of market manipulators’ schemes.

Avoid Penny Stocks

Penny stocks, nano stocks, and micro-cap stocks are often the lowest priced securities on the market and are often low-float stocks, which makes them highly volatile and more vulnerable to the price movements engineered by market manipulators.

Larger stocks, on the other hand, such as mega-cap stocks, are less vulnerable to market manipulation due to their trading volume and the level of public scrutiny that they are subject to.

Conduct Due Diligence

When alerted to a potential research report, Internet chatroom or social media comment, or other sources of potentially false or misleading news, resist the urge to immediately trade on the information. That’s exactly what market manipulators expect investors to do, and they profit from impulsive market actions.

Instead, stay calm and do your research to see if there’s any validity to the news–or red flags to indicate manipulation.

Know the Scams

Awareness of schemes such as pump-and-dump or spoofing can make it easier for you to spot them in action.

The Takeaway

Market manipulation is the act of artificially moving the price of a security and profiting from that movement. Even sophisticated investors can fall victim to market manipulation, but understanding how such schemes work can help you spot and avoid them.

Knowing the basics of market manipulation, and how to sidestep it (if possible) can be another tool in an investor’s toolkit. It’s also worth noting that regulators are on the hunt for it, too. If you have further questions, it may be beneficial to speak with a financial professional.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is the criminal punishment for market manipulation?

Potential punishments for market manipulation depend on the specifics of the crime, the charges, and a potential conviction, but they can involve hefty fines and many years in jail, in some circumstances.

How do big investors manipulate the stock market?

It’s possible that some bad actors spread rumors or false news about market movements in an attempt to influence sentiment, spoofing the markets, or engaging in pump-and-dump schemes.

How do short sellers impact stock prices?

It’s possible that short sellers can drive the value of a stock down, improving the short sellers’ positions, in the short-term.

Photo credit: iStock/HAKINMHAN

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-026

Jul

2025

Complete Guide to the Volume-Weighted Average Price Indicator (VWAP)

By Brian Nibley | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Volume-Weighted Average Price (VWAP)?
Why Is VWAP Important?
How Is VWAP Used in Trading?
How to Calculate VWAP
How Do You Read a VWAP Chart?
Limitations of VWAP
Is VWAP Good for Swing Trading?
A Cumulative Indicator
FAQ

The volume-weighted average price indicator (VWAP) captures the average price of a stock during a single trading session, weighted by trading volume and price.

VWAP is a short-term technical analysis indicator, and it shows up as a single line on intraday charts.

Professionals and retail investors can use the VWAP indicator to identify liquidity points, or as part of a broader trend confirmation strategy.

VWAP also helps determine the target price for a particular asset, helping traders determine when to enter or exit a position. VWAP restarts at the opening of each new trading session, and is thus considered a single-day indicator.

Key Points

• The volume-weighted average price indicator (VWAP) captures the average price of a stock, weighted by trading volume and price.

• VWAP is a short-term technical analysis indicator that restarts at the opening of each trading session.

• It captures a stock’s price action throughout the day, and can give traders insights into price trends and value.

• VWAP can help traders decide when to enter or exit a position.

• VWAP is only useful for a single trading session.

What Is Volume-Weighted Average Price (VWAP)?

The volume-weighted average price (VWAP) is a technical analysis indicator that shows a security’s average price during a specific trading session, adjusted for trading volume. In effect, it’s a measure of demand for that security.

It’s similar to the moving average indicator (MA), but because VWAP factors in trading volume, it’s a stronger indicator of the security’s value.

VWAP is calculated as the total amount traded for every transaction (price x volume) and divided by the total number of shares traded. VWAP can be used by professionals as well as retail investors, who may buy stocks online or through a brokerage.

Why Is VWAP Important?

VWAP is important to traders and financial institutions for a few reasons when trading stocks. They can use the VWAP in combination with different trading strategies because it helps determine whether an asset might be over- or underpriced based on the current market.

VWAP also helps identify a target price for the security so traders can aim for the best exit or entry points, depending on the strategy they’re using.

This benefits day traders, but also comes into play during corporate acquisitions, or big institutional trades. Retail investors can also make good use of VWAP.

Accuracy

One reason traders use VWAP is because it removes some of the static around a security’s price movements, and thus this indicator can provide a more realistic view of a security’s price throughout the day.

Trend Confirmation

Traders can also use the volume-weighted average price to gauge the strength and momentum of a price trend or reversal. When a price is over the VWAP, it might be considered overvalued. When it’s below the VWAP it may be undervalued.

Thus it’s possible to determine support and resistance levels using the VWAP.

Simplicity

In many ways VWAP is a quick and easy way to interpret a security’s price and trend, and decide whether to make a trade.

How Is VWAP Used in Trading?

As a trend indicator, VWAP adds more context to the moving average (MA). Since a moving average does not take volume into account, it could potentially be misleading when relatively big price changes happen on low volume, or if relatively small price changes happen despite large volume.

In addition, moving averages aren’t always helpful for short-term traders, because MA’s require longer time frames to provide good information. The VWAP is a short-term indicator, as it involves one data point for each “tick,” or time period of a selected chart (each minute on a 1-minute chart, for example).

In addition, the VWAP is flexible enough to be used by different types of investors.

Institutional Investors

Large institutional investors and algorithm-based traders use the VWAP to make sure they don’t move the market too much when entering into large positions. Buying too many shares too quickly could create price jumps, making it more expensive to buy a security.

Instead, some institutions try to buy when prices fall below the VWAP, and either sell or pause purchases when prices rise above the VWAP, in an attempt to keep prices near their average.

Retail Traders

Retail investors can use the VWAP as a tool to confirm trends. As noted above, the VWAP indicator is similar to a simple moving average with one key difference — VWAP includes trading volume, as the name implies. Why does this matter?

Moving averages (MA) simply calculate average closing prices for a given security over a particular period (e.g., 9-day MA, 50-day MA, 200-day MA, etc.). Adding volume to an indicator helps confirm the potential strength of a trend.

How to Calculate VWAP

VWAP is a ratio that indicates the relationship between an asset’s price and its volume. When used as a technical indicator on a chart, the computer automatically calculates VWAP and displays it as a single line.

Investors can also calculate VWAP manually. The two main pieces of the equation include:

• Typical price + volume

• Cumulative volume

The formula for calculating VWAP equals the typical price (the average of the low price, the high price, and the closing price of the stock for a given day) multiplied by the number of shares traded in a given day, divided by the total number of shares traded (cumulative volume).

Calculated daily, VWAP begins when the markets open and ends each day when the markets close. As such, tracking the VWAP for various securities can help with understanding the stock market.

Calculating a 30-Day VWAP

The 30-day VWAP is equivalent to the average of the daily VWAP over a 30-day period. So, to calculate the 30-day VWAP, you would have to add up the daily closing VWAP for each day, then divide the total by 30.

How Do You Read a VWAP Chart?

As with most technical indicators, there are many different ways to interpret the VWAP. Some of the most common ways to use this indicator for price signals include establishing support and resistance, indicating a trend being overextended, or using VWAP in combination with a different indicator.

Support and Resistance

This might be one of the simplest ways to read a chart using VWAP. One method for reading a VWAP chart is to use the line as an indicator for short-term support and resistance levels. If prices break beneath support, this could indicate further weakness ahead. If prices break above resistance, this could indicate more bullish momentum is yet to come.

Support and resistance are commonly measured using historic points of price strength or weakness, but this becomes more difficult when time frames are very short. Traders may use a volume-weighted indicator like the VWAP to predict short-term moves.

Trend Overextended

When looking at the VWAP indicator on a short-term chart, there could be times when price action goes far beyond the VWAP line.

If price quickly goes too far above the line on heavy volume, this could indicate that the security has become overbought, and traders might go short. If price quickly falls far below the line, this could indicate that the security has become oversold, and traders might go long.

Of course, there is a subjective component involved in determining the exact definition of “overextended.” Typically, however, investors assume that price tends to return to the VWAP line or close to it, so when prices go too far beyond this line one way or the other, they could eventually snap back.

Recommended: Understanding Stock Volatility

VWAP Plus MACD

As they do with many technical indicators, investors often use the VWAP indicator in conjunction with other data points.

Technical analysis can become more effective when using multiple indicators together. By confirming a trend in multiple ways, investors can feel more confident in their projections.

As an example, some traders like to look at the VWAP while also looking at the Moving Average Convergence Divergence (MACD).

If the MACD lines see a bullish crossover around the same time that prices become overextended to the downside beneath the VWAP line, this could indicate a buying opportunity. If the MACD shows a bearish crossover as prices stretch far above the VWAP line, this could indicate a good time to close out a trade or establish a short position.

Limitations of VWAP

The VWAP is useful for day traders because it’s based on that day’s trading data; it’s more difficult to use the VWAP over the course of many days, as that can distort the data.

VWAP is also a lagging indicator, so while it captures recent price changes, it’s less useful as a predictive measure.

Is VWAP Good for Swing Trading?

It’s impossible to explore the role of VWAP in trading without addressing swing trading with this indicator.

The VWAP tends to work well for short-term trading like day trading and short- to medium-term trading like swing trading, in which investors hold a position for anywhere from a few days to a few weeks.

Using the VWAP on a daily basis could potentially help swing traders determine whether to continue to hold their position. If a short-term chart consistently shows prices beneath the VWAP, this fact could combine with other information to help the trader decide when to sell.

A Cumulative Indicator

It’s important to note that VWAP is what’s known as a cumulative indicator, meaning the number of data points grows higher as the day goes on. There will be one data point for each measurement of time on a given chart, and as the day passes, these points accumulate.

A 5-minute chart would have 12 data points one hour after the market opens, 36 after 3 hours, and 84 by the time the market closes. For this reason, VWAP lags the price and the lag increases as time goes on.

The Takeaway

The volume-weighted average price (VWAP) is essentially a trading benchmark that captures the average intraday price of a given security, factoring in volume. It’s considered a technical indicator, and it’s important because it gives traders insight into a security’s price trend and value, making it helpful for intraday analysis.

VWAP is one data point among many that traders might use when devising their investment strategy, and it’s typically used with other technical indicators.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is the difference between the volume-weighted average price and a simple moving average (SMA)?

The simple moving average or SMA just shows the average price of a security over a period of time. The volume-weighted average price, or VWAP, factors in the asset’s trading volume over the course of the day as well, thus giving investors more information about demand and price trends.

How do you use VWAP in day trading?

Day traders often use VWAP to determine the target price of an asset, the better to determine the entry and exit points for trades, based on their current strategy, whether long or short.

What is the difference between anchored VWAP vs VWAP?

Traditional VWAP always starts with the opening price of the day (VWAP is primarily used as an intraday metric), whereas anchored VWAP allows the trader to specify a certain price bar where they want their calculation to start.

Photo credit: iStock/Pheelings Media

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-024

Jul

2025

Averaging Down Stocks: Meaning, Example, Pros & Cons

By AJ Smith | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is Averaging Down?
Example of Averaging Down
Why Average Down on Stock
Pros and Cons of Averaging Down
Tips for Averaging Down on Stock
FAQ

Averaging down stocks is when an investor buys more shares of a stock they already own after that stock has lost value — and essentially buys more of the same stock at a discount. In effect, the averaging-down strategy is a way of lowering the average cost of a stock you already own.

It’s similar to dollar-cost averaging, where you invest the same amount of money in the same securities at steady intervals, regardless of whether the prices are rising or falling, thereby lowering your average cost basis over time.

While this strategy has a potential upside — if the stock price rises again — it can expose investors to greater risk if the price continues to decline.

Key Points

• To average down, an investor buys additional shares of a stock they already own, after the price has declined.

• Averaging down is a way to lower the average per-share cost of a position, potentially setting the investor up for bigger gains, assuming the stock rebounds.

• The advantage of the averaging down strategy is the potential for gains, if the stock prices rises again.

• If the stock price continues to fall, however, the investor would face larger losses.

• Averaging down is similar to dollar-cost averaging, which involves investing the same dollar amount on a steady basis, which can lower the average cost per share in a portfolio.

What Is Averaging Down?

By using the strategy of averaging down and purchasing more of the same stock at a lower price, the investor lowers the average price (or cost basis) for all the shares of that stock in their portfolio.

So if you buy 100 shares at one price, and the price drops 10%, for example, and you decide to buy 100 more shares at the lower price, the average cost of all 200 shares is now lower.

Example of Averaging Down

Consider this example: Imagine you’ve purchased 100 shares of stock for $70 per share ($7,000 total) by investing online or through a broker. Then, the value of the stock falls to $35 per share, a 50% drop.

To average down, you’d purchase 100 shares of the same stock at $35 per share ($3,500). Now, you’d own 200 shares for a total investment of $10,500. This creates an average purchase price of $52.50 per share.

Potential of Gain Averaging Down

If the stock price then jumps to $80 per share, your position would be worth $16,000, a $5,500 gain on your initial investment of $10,500.

In this case, averaging down helped boost your average return. If you’d simply bought 200 shares at the initial price of $70 ($14,000), you’d only see a gain of $2,000.

Potential Risk of Averaging Down

As with any strategy, there’s risk in averaging down. If, after averaging down, the price of the stock goes up, then your decision to buy more of that stock at a lower price would have been a good one. But if the stock continues its downward price trajectory, it would mean you just doubled down on a losing investment.

While averaging down can be successful for long-term investors as part of a buy-and-hold strategy, it can be hard for inexperienced investors to discern the difference between a dip and a true price decline.

Why Average Down on Stock

Some investors may use averaging down stocks as part of other strategies when trading stocks.

1. Value Investing

Value investing is a style of investing that focuses on finding stocks that are trading at a “good value” — in other words, value stocks are typically underpriced. By averaging down, an investor buys more of a stock that they like, at a discount.

But in some cases, a stock may appear undervalued when it’s not. This can lead investors who may not understand how to value stocks into something called a value trap. A value trap is when a company has been trading at low valuation metrics (e.g. the P/E ratio or price-to-book value) for some time, and is not likely to rise.

While it may seem like a bargain, if it’s not a true value proposition the price is likely to decline further.

2. Dollar-Cost Averaging

For some investors, averaging down can be a way to get more money into the market. This is a similar philosophy to the strategy known as dollar-cost averaging, as noted above, where the idea is to invest steadily regardless of whether the market is down or up, to reap the long-term average gains.

3. Loss Mitigation

Some investors turn to the averaging down strategy to help dig out of the very hole that the lower price has put them into. That’s because a stock that has lost value has to grow proportionally more than it fell in order to get back to where it started. Again, an example will help:

Let’s say you purchase 100 shares at $75 per share, and the stock drops to $50, that’s a 33% loss. In order to regain that lost value, however, the stock needs to increase by 50% (from $50 to $75) before you can see a profit.

Averaging down can change the math here. If the stock drops to $50 and you buy another 100 shares, the price only needs to increase by 25% to $62.50 for the position to become profitable.

Pros and Cons of Averaging Down

As you can see, averaging down stocks is not a black-and-white strategy; it requires some skill and the ability to weigh the advantages and disadvantages of each situation.

Pros of Averaging Down

The primary benefit to averaging down is that an investor can buy more of a stock that they want to own anyway, at a better price than they paid previously — with the potential for gains.

Whether to average down should as much be a decision about the desire to own a stock over the long-term as it is about the recent price movement. After all, recent price changes are only one part of analyzing a stock.

If the investor feels committed to the company’s growth and believes that its stock will continue to do well over longer periods, that could justify the purchase. And, if the stock in question ultimately turns positive and enjoys solid growth over time, then the strategy will have been a success.

Cons of Averaging Down

The averaging-down strategy requires an investor to buy a stock that is, at the moment, losing value. And it is always possible that this fall is not temporary — and is actually the beginning of a larger decline in the company and/or its stock price. In this scenario, an investor who averages down may have just increased their holding in a losing investment.

Price change alone should not be an investor’s only indication to buy more of any stock. An investor with plans to average down should research the cause of the decline before buying — and even with careful research, projecting the trajectory of a stock can be difficult and potentially risky.

Another potential downside is that the averaging down strategy adds to one particular position, and therefore can affect your asset allocation. It’s always wise to consider the implications of any shift in your portfolio’s allocation, as being overweight in a certain asset class could expose you to greater risk of loss.

Tips for Averaging Down on Stock

If you are going to average down on a stock you own, be sure to take a few preparatory steps.

• Have an exit strategy. While it may be to your benefit to buy the dip, you want to set a limit should the price continue to fall.

• Do your research. In order to understand whether a stock’s price drop is really an opportunity, you may need to understand more about the company’s fundamentals.

• Keep an eye on the market. Market conditions can impact stock price as well, so it’s wise to know what factors are at play here.

The Takeaway

Simply put, averaging down is a strategy where an investor buys more of a stock they already own after the stock has lost value, in order to lower the average cost basis of that position.

The idea is that by buying a stock you own (and like) at a discount, you lower the average purchase price of your position as a whole, and set yourself up for gains if the price should increase. Of course, it can be quite tricky to predict whether a stock price has simply taken a dip or is on a downward trajectory — so there are risks to the averaging down strategy for this reason.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is averaging down a good idea?

It depends on the stock in question. Averaging down can be a good idea when the investor has done their due diligence, and believes they can buy at the lower price and the stock is likely to rebound. Otherwise, averaging down can put the investor at a risk of further losses.

What is an alternative to averaging down?

One alternative is to sell the stock you have, rather than add to the position. This has the potential advantage of freeing up funds to invest in another stock or security. Another option is to do nothing, observe how the stock behaves, and use that to inform later decisions.

When does averaging down not work?

When the stock price doesn’t rise. So, if an investor sees that shares of a stock they own are dropping, they could attempt to average down by buying more shares of that stock. But if the stock continues to decline in value, they will see bigger losses.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-023

How to Use the Risk-Reward Ratio in Investing

What Is the Risk-Reward Ratio?

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How to Calculate Risk-Reward Ratio

Risk-Reward Ratio Formula

Example of a Risk-Reward Ratio Calculation

Pros and Cons of the Risk-Reward Ratio

Three Risk-and-Reward Investor Types

How Investors May View Risk vs. Reward

The Takeaway

FAQ

What is a good risk-reward ratio?

What is a poor risk-reward ratio?

What are some things that the risk-reward ratio doesn’t take into account?

What Is a Roth 401(k)?

Roth 401(k) Definition

History and Purpose of the Roth 401(k)

How a Roth 401(k) Works

Differences Between a Roth 401(k) and a Traditional 401(k)

How Employer Matching Works in a Roth 401(k)

Roth 401(k) Contribution Limits

Catch-Up Contributions for Those 50 and Older

Roth 401(k) Withdrawal Rules

Early Withdrawal Rules

Roth 401(k) RMDs

Pros and Cons of a Roth 401(k)

Pros

Cons

Is a Roth 401(k) Right for You?

The Takeaway

FAQ

How is a Roth 401(k) taken out of a paycheck?

What is the 5-year rule for a Roth 401(k)?

What happens to a Roth 401(k) when you quit?

Do I need to report a Roth 401(k) on my taxes?

Can you roll over a Roth 401(k) into a Roth IRA?

Market Manipulation: An Overview for Retail Investors

What Is Market Manipulation?

What Are Examples of Market Manipulation?

“Pump-and-Dump”

The Poop-and-Scoop Scheme

The “Wash” Method

Trade “Spoofing”

Marking the Close

How to Avoid Market Manipulation

Invest for the Long Term

Avoid Penny Stocks

Conduct Due Diligence

Know the Scams

The Takeaway

FAQ

What is the criminal punishment for market manipulation?

How do big investors manipulate the stock market?

How do short sellers impact stock prices?

Complete Guide to the Volume-Weighted Average Price Indicator (VWAP)

What Is Volume-Weighted Average Price (VWAP)?

Why Is VWAP Important?

Accuracy

Trend Confirmation

Simplicity

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How Is VWAP Used in Trading?

Institutional Investors

Retail Traders

How to Calculate VWAP

Calculating a 30-Day VWAP

How Do You Read a VWAP Chart?

Support and Resistance

Trend Overextended

VWAP Plus MACD

Limitations of VWAP

Is VWAP Good for Swing Trading?

A Cumulative Indicator

The Takeaway

FAQ

What is the difference between the volume-weighted average price and a simple moving average (SMA)?

How do you use VWAP in day trading?

What is the difference between anchored VWAP vs VWAP?

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